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Periodic Contributor

Social Security Benefits Estimate Based on Past Earnings

I am going to be self-employed for the remainder of my working years and probably even after I hit 70.  I do get a yearly statement from SS giving me an idea of what I can expect to get depending on when I choose to start dipping into SS.  Could be this year, I am trying to decide.

But, my question is:  The statements say that the benefit amounts are an "estimate" based on my income for the past 40 years and assuming that I will continue to make that same amount.  But I won't be.  And since I will be paying very little into SS while being self-employed, I am thinking that those estimates will no longer change?  Will no longer increase?

 

I am trying to get confirmation that the only way those estimates will go up is if I replace one of the years I didn't make much via employers, with a better year of income via an employer.

And since I will not be paying into SS via an employer between now and 70 years of age, then I can assume that my most current statement and "estimate" is the best I can expect.

 

Bottomline, just to be clear, is that if I do not pay anymore into SS, then those estimates will not increase.  I can assume that I will need to budget based on my last SS statement, right?

Of course I do hope to pay into my savings accounts instead.

 

I have searched and searched for information/confirmation of this and can't find my question anywhere.  Thanks!

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Honored Social Butterfly

Yes, it is an estimate and the estimate is based on a presumption of future earnings.  They use the presumptions to forecast your benefits at 62, FRA and at 70 - so if you stop getting the earnings as high as their presumption - then your benefit will be smaller - but how much smaller will depend on how many years and the reduced earnings you have to that date of retirement - either 62, FRA or 70 or any age in between.  It will also depend on if you have other years of earnings which haven't been include in the estimate but which would be higher than these more current reduced wages - It is still the Highest 35 years of earnings.

If the presumptive formula is wrong for you - your estimate is overstated.

 

It's Always Something . . . . Roseanna Roseannadanna

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Honored Social Butterfly

@CatherineP879665 said

". . . . I will not be paying anymore into SS while being self-employed"

". . . . And since I will not be paying into SS via an employer between now and 70 years of age, then I can assume that my most current statement and "estiamte" is what I can expect."

. . . . Bottomline, just to be clear, is that if I do not pay anymore into SS, . . . . 

 

You are starting off with an incorrect premise here - You will continue to pay Social Security withholding taxes on any earned income - of which, self-employed income is earned income.

In fact, on the tax return that you will file as a sole-proprietor or self-employed - you will pay your withholding taxes AND then match the same amount as the employer. 

 

Also, if you DELAY getting your Social Security past your full retirement age (FRA) until 70, you will earn a bonus in your benefit called the delayed retirement credit - it is about 8% a year for the delay.

So if your FRA is 67 and you don't start your benefit until 70, you will get about a 24% bonus (8% X 3 years) in your benefit.

 

Start Here and then search or find various subjects on SS Retirement benefits.

SSA Retirement Planner

SSA Delayed Retirement Credits

IRS Self Employment Tax - Schedule SE

 

 

It's Always Something . . . . Roseanna Roseannadanna
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Periodic Contributor

Although I do pay taxes on my self-employment income, this is the first year that I will only have my own income and not that of an employer.  In the past, although I paid a tax on my self-employment earnings via the Schedule SE, I certainly didn't have to match the same amount as any of my employers.  And it would be a miracle if my income from self-employment was ever large enough to warrant paying a tax anywhere near what I paid in when I was employed.

Yes, I know from my SS statements exactly how much the increase will be for each year that I delay.  But the main question is, if my income from self-employment is not enough to knock off any one of the highest 35 years currently used by the SS statement to base my benefits on, then those numbers are never going to go up from my most current statement.  Right?

Basically the main question is regarding the "estimates" on the statements.  They state that the numbers are based on the assumption that I continue to make (via employers) as much as I have in the past.  But I won't be.  I will not be making anywhere near as much.

 

So, if for example, I did not pay anymore into SS between now and when I turn 70, then those estimates are not going to go upwards are they?

That, and if their estimates are assuming I am going to continue to earn as much as I have in the past, then the numbers for when I turn 70 are too high and in reality I should only expect the amount I would get when I hit 65.

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Honored Social Butterfly

@CatherineP879665 wrote:

In the past, although I paid a tax on my self-employment earnings via the Schedule SE, I certainly didn't have to match the same amount as any of my employers.  

 

Of course, you did - on the vast majority of any self employment income

Schedule SE line 10 and 11.  

10 Multiply the smaller of line 6 or line 9 by 12.4% (0.124) . . . . 
11 Multiply line 6 by 2.9% (0.029) . . . . . . . . . . . . . . . . . . . . . . . . 

IRS Schedule SE

 

Right, any newer earned income would have to be higher than a year it could replace with lower income to change your benefit by any substantial amount.

That's what any earned income will do - regardless of whether it is from self-employment or an employer.  But remember there is the inflation index factor.

 

Most people make more in their later years of working than when they 1st began their earned income.  But if not - they still use the highest 35 years to figure your benefit.  Like RetiredITGuy said "after indexing for inflation" and his link for the figures.

 

@CatherineP879665 wrote

So, if for example, I did not pay anymore into SS between now and when I turn 70, then those estimates are not going to go upwards are they?

 

Your benefit calculation to FRA won't change but your benefit will be higher at 70 because of the delayed retirement credits.

 

 

 

It's Always Something . . . . Roseanna Roseannadanna
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Periodic Contributor

SSA uses the highest 35 years in a benefit calc after indexing for inflation. Explained here https://www.ssa.gov/OACT/ProgData/retirebenefit1.html

 

Periodic Contributor

Exactly!  Therefore, if I am realitively certain I am not going to do better than my best 35 years (out of 47 years worked) then I can assume that my most current SS statement is the best I am going to see.  

I know that waiting until I am 70 will get me a better check, but if you look at the increase over retiring at 66.5 then for me, it is really only about $4,000 per year.

 

But what I really want confirmation on is, the "estimate" terminology on the statement.

If the numbers are an "estimate" based on past earnings, then the amount stated for me waiting until I am 70 is inflated and based on an income I will not have between now and then.

My problem has been finding any information regarding the "estimate" and what would cause the estimate to no longer increase.

Looking for confirmation of what I think I understand.

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Periodic Contributor

If you have established your 35 years of high earnings then that determines the total amount you will receive if you live until your expected age. If you start taking it at age 62 then you get less each month but the same total. If you wait till 70 then you get more per month but the same total by the time you die at you expected age. This is close enough to being true that folks will argue about the details all day long. 

I think your question is will this be affected by continuing to work? and the answer is no, your amounts are determined by your 35 highest years. You get about 8% more (after inflation) each year you wait to begin. 

The best advice I have heard is because SS is designed to give you the same total if you die at your expected age, it doesn't really matter much when you take it. just make it convenient for your situation.

And if you are self employed, pay your FIT and FICA tax each quarter to avoid penalties. FICA runs about 15% for self-employed. Don't forget state income tax too. 

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Periodic Contributor

Thank-you, but I already know all of this.  No one is addressing the one question.  So let's go all the way back and just focus on this one question regarding the estimates which the SS states are based on assuming one will be continueing to earn the same amount as before.

If the SS is giving me numbers based on an assumption that I will be continueing to work and making the same amount as before, then all of their numbers for the years after I turn 66.5 are pure speculation, right?

Because those numbers are based on an income I will not be making.

Yes, I have been filing all taxes and all forms for all self-employed income for the last 12 years, ever since I began making a little extra income via items I make and sell.  Even in my best year, I did not make enough selling these items to be above the poverty level had they been my sole source of income.  So I am not talking about a lot of money here.

I just want confirmation that the SS estimates are just that, estimates.  And therefore I cannot expect to get the amounts they have listed for when I turn 70 because I will not be making as much in the years waiting until I turn 70.  There is little or no information regarding these "estimates" in terms of what circumstances would cause those estimates to cease to increase at all.  

This is a huge deal to me.  I have not been able to find a job and I have no more UI benefits available.  I need to decide before the end of this year and I want to make the best decision I can.

Again, if the SS estimates for what I will get when I turn 70 are based on an income I will not be making, then I will NOT be getting that much when I turn 70.  I will only be getting the amount they have listed for 66.5.

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Gold Conversationalist

@CatherineP879665 

I agree that the SS benefit estimator can be a bit too simplistic for some needs. I was never comfortable with that "projection" they use, as you have found. But there are other tools you can use to get an accurate value for your SS retirement benefits.

 

As mentioned before, your benefit is based on the "highest 35 years" of earnings. A caution about this, the earnings are factored based on inflation, which is variable, so don't simply take literally the highest 35 years earnings. Calculators are available (below) that will calculate your benefit based on your years of earnings, be sure to include all years in these, not just the "highest 35".

 

The SSA provides this calculator  https://www.ssa.gov/benefits/retirement/planner/AnypiaApplet.html where you enter your actual wage history (this can be downloaded or copied from your My Social Security page).

An alternate on-line calculator is https://ssa.tools/calculator.html, again, you need to enter your wage history.

 

Probably the Gold Standard is to download and use the Anypia32.exe program from the SS administration. This you must download and install on your computer. It's a bit of work to get up to speed on it but it is very worthwhile.

 

Using any of these free calculators will give you a realistic estimate of your SS benefits under current rules without any assumptions or projections being made.

 

Good Luck!

Conversationalist

@fffred and @CatherineP879665 It is always clever to check the logic and data that calculators use to develop numerical amounts. With regard to the Primary Insurance Amount (PIA), indexing earnings over 35 years is a key factor. Hopefully, I copied and pasted a SS link that will illustrate how important indexing is in developing your SS benefit amount. https://www.ssa.gov/OACT/COLA/Benefits.html Take a look at the entire link inasmuch as there is important info including examples for low wage and higher wage cases. You can find your indexing factors by clicking on the link, "Indexing Factors For Earnings". You enter the year you attain age 62 and enter. You will see all the factors, year by year. Please note that indexing stops upon attaining age 60. So, the factor becomes 1.00 thereafter. If you doubt the SS calculator, you may check the calculators results or develop your own calculation "long hand". Simply perform arithmetic calculations for each year you have earnings. Pick the highest 35, divide by 420 months and your result is the Average Indexed Monthly Average (AIME). Remember, zeroes must be used for each year under 35 with no earnings. The variables are the "bend points" which may change annually. However, the percentages (90%, 32%, 15%) have remained the same for years. Some folks may balk at compiling 35 or more arithmetic calculations. If you went to a similar grammar school where calculators were not allowed (1950s and 1960s), it was not uncommon to develop on paper the multiplication tables from 1 to 9 or 81 calculations. I believe you can trust the SS calculators. In fact, the calculators do a better job of rounding decimals which may vary your benefit a buck or two. However, just for fun, do the manual calculations and see the amounts that are 3, 4, 5 or more times your actual earnings (especially amounts from the 1970s and 1980s). Moreover, you did not have to pay FICA taxes on those increased amounts. Hope this helps. 

Conversationalist

@CatherineP879665  There is a SSA paper on Benefit Estimates. I will try to copy and paste the link. https://www.ssa.gov/policy/docs/briefing-papers/bp2020-01.html It is a long read. However, you seem to know how your SS benefit is developed. So, you should be able  to understand the info and data. The short answer is the older you are and closer to retirement, the more accurate is the estimate. Using baseball phrases, your estimate is in the ballpark. In fact, it is probably in the diamond. It could be in the batter's box if have already worked 35 years and are within 2 years of starting your SS benefit. If my copy and paste link did not work, you may google the SSA paper, Analysis of Benefit Estimates Shown in the Social Security Statement SSA (Oct 2020).   

Periodic Contributor

(In your specific case) SS is not estimating your benefit based on any projected earnings. It is basing its estimate on your top 35 years it already knows about. 

It's called an estimate because the exact number will be calculated when you file for benefits. Since your top 35 years are set, the estimate is not going to change (very much) except for COLA's and depending on when you start collecting. 

Hope this helps

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Periodic Contributor

That is not true.  Per the most recent SS statement this January: 

"These personalized estimates are based on your
earnings to date and assume you continue to
earn $00000 per year until you start your benefits."  with the amount they quoted replaced by zeros.

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Periodic Contributor

Yes I agree - Above in this long thread, you said you had worked 47 years and had already experienced your top 35 years of earnings. Your estimate will be made from your top 35 years of actual earnings - some which are in the past and therefore known and some which are in the future and use the number they are assuming. If they think you are going to be making a lot in the last few years then perhaps they are over-estimating your top 35 years and have a high estimate. 

The problem is its hard to check their calc because after projecting your earnings to fill out your earnings history, they need to adjust the numbers for inflation and get everything stated in the dollars used in the year of your full retirement age, then they choose the top 35 years and then calc the estimate. Whew!

If the number they are using for projected earnings for your last 4 years is part of the 35 and you don't achieve that then yes the estimate could be high. 

Honored Social Butterfly

Yes, it is an estimate and the estimate is based on a presumption of future earnings.  They use the presumptions to forecast your benefits at 62, FRA and at 70 - so if you stop getting the earnings as high as their presumption - then your benefit will be smaller - but how much smaller will depend on how many years and the reduced earnings you have to that date of retirement - either 62, FRA or 70 or any age in between.  It will also depend on if you have other years of earnings which haven't been include in the estimate but which would be higher than these more current reduced wages - It is still the Highest 35 years of earnings.

If the presumptive formula is wrong for you - your estimate is overstated.

 

It's Always Something . . . . Roseanna Roseannadanna
Periodic Contributor

So, if I know that I am NOT going to be making as much as I have in the past, then the numbers on my current statement are correct for if I retire at 65.  But not correct if I wait until I am 70 because I will not be replacing any of my highest 35 years.  

Because the numbers they give me for waiting until I am 70 are based on their assumption that I would be replacing at least a few of the lowest of the 35 years based on my most recent and higher earnings.  And I won't be.

So it would not be in my best interest to wait until I am 70 to retire.  The difference would only be about $3,000 a year.  

It HAD always been my hope to wait until I turned 70.  But I am in circumstances that make that almost impossible.

At best, I might be able to bank funds during the next 10 years or so to make up for the missing $3,000/year.  Assuming I keep working as a self-employed artist until I am at least 75.

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Conversationalist

@CatherineP879665 If you retire at age 65, there will be an actuarial reduction to your SS benefit (PIA) inasmuch as you are starting before your Full Retirement Age (FRA). In an earlier posting, you referenced age 66.5 or 66 years 6 months which would indicate that you were born in 1957. If that is your birth year, you will attain FRA in either 2023 or 2024 depending on the month you were born. So, depending on the date your SS Estimate was developed, the SSA may not have all your actual earnings and projected earnings for the past missing years as well as future years to reach your FRA SS benefit. The calculators at the website may be more current. You will know if this has a material impact on your SS benefit at FRA if you develop your own 35 years and Average Indexed Monthly Earnings (AIME). Remember, the SS formula does not index your actual earnings after age 60. Can it get any more complicated? Yes, it can. There are many SS benefit claiming strategies. Some are for singles, married, divorced, and widow(ers). Some are focused on obtaining a greater monthly SS benefit. Whereas other strategies are focused on obtaining a greater amount of SS benefits over a lifetime. Folks focusing on greater lifetime benefits must consider life expectancy as well. At any rate, the SS Estimate (paper or website) is a great starting point. You are on the right track. However, as others have pointed out, it is an Estimate. In your case, you did not indicate the last year that the SS Estimate recorded earnings. If you received the SS Estimate recently, 2021 and perhaps 2020 are not included. If you stopped working (W2 Earnings) in 2020, SS has projected 2019 earnings for 2020 and 2021 in your most recent SS Estimate. If those projections are greater than your past 35 years, your estimated FRA SS benefit (age 66.5) may be overstated. Keep on mind that one year represent only 2.8571% or .028571 of the 35 year average and two years is 5.7143% or .057143. Moreover, it is that percentage of the change (difference,if any) between the higher year and the lower year that is being replaced. For example, one year ($30,000) is replacing a lower year ($25,000) for a net change of $5,000. That will increase your AIME by $142 ( $5,000 X .028571). I have rounded and truncated remainder decimals. The key point is that unless there was a significant change in earnings, the change is minimal. With regard to delaying your SS benefit to age 70, this strategy makes sense if you are focusing on obtaining greater lifetime SS benefits if you are otherwise expecting to live longer than average (ages 83 through 84). In the short run, you give up SS benefits from FRA (66.5) to age 70 or 42 months to receive a greater (28%) SS benefit at age 70. If you are entitled to a SS benefit of $1,500 at FRA, you will forgo $63,000 ($1,500 X 42 months) to receive $1,920 at age 70 or about $420 per month more ($1,500 X 1.28). It will take about 12.5 years to become equal to starting at FRA or age 82.5. If you invest the money or some of it, it will take longer. The SS benefit calculation is, at times, as clear as mud. I hope this helps.

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Periodic Contributor

Thanks, but way too much info, the majority of which I had already read elsewhere.  I will go by the statement generated for me on the SS website.  I get a statement every year.  Just had one simple question regarding the word they use on these statements, "estimate."

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Conversationalist

@CatherineP879665 I am not sure if you are replying to my posting. In any event, I agree that the SS benefit formula (PIA) is complex (requires substantial information) and is complicated (requires multiple arithmetic calculations). So, when planning for retirement income, some folks simply rely on the SS Estimate whether paper or online calculator. As other folks have pointed out, the SS Estimate is just an estimate or an approximate calculation. The SS paper (October 2020) that I linked in my April 18, 2022 post at 9:48 am provides various percentages of accuracy within 10% for different age brackets. Tables 4,5, and 6 of that SS paper indicate that for the age 55 bracket the estimate is within 10% of the actual SS benefit between 81% -91% of the time. It further states that for older folks close to retirement, accuracy is better. So, you may be closer to the 91% statistic. If that is reasonable in your case, the SS Estimate is a great resource and planning tool. However, your posting sounded like a "mission critical" exact SS benefit was needed due to other issues. In fact, you advised in your April 17, 2022 post at 8:20 pm that this was a huge deal to you and provided various reasons. At any rate, the SS Estimate (paper) does emphasize that your actual benefit may differ from the estimated benefit because of a number of factors. The first factor noted is that earnings may increase or decrease. The SS Estimate that you recently received may have earnings only through 2019 or 2020. It would be amazing if the SS Estimate had 2021 earnings already in their data base.So, unless you had two years of zero earnings, the SS software will project earnings from your last year of earnings. If that last year of earnings was one of your higher years, the projections are inflated and your most recent estimated SS benefit is overstated for ages 66.5 and 70. The only way to obtain a reasonably accurate SS benefit is to calculate your SS benefit via an online calculator or paper and pencil. You will know your last one or two years of earnings that may be missing from the SS Estimate and you know your bend points which are established at age 62. The only variable is COLA which may be increasing again due to inflation.

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Periodic Contributor

Sounds to me like you are in good shape to start collecting. It's nice to have your Medicare part B withheld from the SS check so that makes it easy. If you sell a lot of art then you can bank some of it. Hope you enjoy yourself!

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Periodic Contributor

I have a different source of health insurance via the state I live in and will be able to keep it.  It costs me nothing.  Not even for meds.  I would be really upset if I had to pay anything out of my SS check because the amounts quoted on the Medicare site would amount to almost 10% of my check.  One cannot even rent an apartment in this area with the entire amount of what I would be getting from SS.

I would really rather not start collecting SS, but I may not have any choice.

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Honored Social Butterfly

@CatherineP879665 wrote:

I have a different source of health insurance via the state I live in and will be able to keep it.  It costs me nothing.  Not even for meds.  I would be really upset if I had to pay anything out of my SS check because the amounts quoted on the Medicare site would amount to almost 10% of my check.  One cannot even rent an apartment in this area with the entire amount of what I would be getting from SS.

I would really rather not start collecting SS, but I may not have any choice.


You may not have a choice but to pay it - the Part B premiums are how Medicare Part B is funded - 25% from premiums and 75% from the government.   If you qualify for a Medicare Savings Program, then your state pays the Part B premiums.

Medicare.gov - Medicare Savings Programs - types and eligibility

 

Some Medicare Advantage plans might give you an extra credit as a reimbursement for the premiums - but that's not written in stone and they can reverse it at any time.

 

You didn't say what type of health insurance you have that, according to your post " a different source of health insurance via the state I live in and will be able to keep it.  It costs me nothing.  Not even for meds. "  but it really is worth researching cause sometimes even state Medicaid does not carry on into later years when you are eligible for Medicare - just depends on what you income will be, including Social Security retirement.

 

It's Always Something . . . . Roseanna Roseannadanna
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Periodic Contributor

I am already arranging to meet with my current insurer to verify what our states website is saying about this.  And according to it, I will be able to continue with my current insurance.  Nothing will change.  But to make certain this is the case, I have an appointment to discuss this and hopefully they can verify this.  I need to file with Medicare before the end of next month and I don't want to do it without being informed first.

Also, I am not sure if this applies to Medicare, but in terms of having to pay a fine (or what ever it is called) for not having health insurance when filing for taxes, that never applied to me because registered members of a Native American tribe recognized by the Bureau of Indian Affairs, are opted out of that.  

So I am pretty sure that "You may not have a choice but to pay it" will not apply to me.  But again, I am making sure of that before hand.  

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